Russian ETF falls on tougher sanctions

Russian stocks fell in New York after the U.S. and the European Union announced tougher sanctions to penalize President Vladimir Putin over his backing of rebels in Ukraine.

The Market Vectors Russia ETF, the largest U.S. exchange-traded fund tracking the nation's companies, slid 2.1 percent to an almost three-month low of $23.85. Futures on the dollar-denominated RTS index dropped 0.8 percent after climbing as much as 1.9 percent. Contracts on OAO VTB Bank, a target of American sanctions, tumbled 2.9 percent in U.S. hours. The Bloomberg Russia-US Equity Index fell for a fourth day and the ruble weakened 0.7 percent.

The Obama administration announced penalties on VTB Bank, Bank of Moscow and the Russian Agricultural Bank along with United Shipbuilding Corp., which has ties with the Russian military. EU governments had earlier in the day agreed to bar Russian state-owned banks from selling shares or bonds in Europe and restricted the export of equipment to modernize the oil industry.

"The bottom isn't visible yet," Ilya Kravets, the New York-based director of investment research at Daniloff Capital LLC, said by phone Tuesday. "What we have seen today is a first serious set of sanctions and there will be a couple more before we near a solution to the crisis."

Kravets said his firm had reduced exposure to Russia "across the board" in the weeks before the sanctions.

The U.S. is also suspending credits that encourage exports to Russia and prohibiting export of certain goods to the energy sector. The EU measures, endorsed by representatives of national leaders, will take effect when the legal texts are published Thursday. New contracts to sell arms to Russia and the export of machinery, electronics and other civilian products with military uses will be banned.

For the first time, the EU sought to hobble broad swathes of Russian industry with the goal of accelerating the flight of capital from the $2 trillion economy. EU and U.S. sanctions jeopardize funding for Russian companies, which have tapped international capital markets for more than $600 billion in debt and equity since the country emerged from its 1998 default.

Russian state-owned lenders, including VTB Group, OAO Sberbank, OAO Gazprombank and Vnesheconombank, have more debt to repay in euros, dollars and Swiss francs than they do in rubles over the next three years, according to data collated by Bloomberg.

American depositary receipts of Sberbank, a state- controlled lender that may be targeted by the EU measures, retreated 1.7 percent to $8.31 on their fifth day of declines. The Bloomberg Russia-US gauge fell 0.8 percent to 83.48, extending its monthly plunge to 9.9 percent. The ruble weakened to 35.8045 per dollar.

RTS index futures declined to 118,700 in U.S. hours. The RTS Volatility Index, which measures expected swings in futures, surged 6.5 percent to 40.81, the highest level since May.

"Volatility remains high because of the incredible degree of unpredictability and low trading volumes," Ivan Manaenko, the head of research at Veles Capital LLC in Moscow, said by phone. "People simply don't know what is next. They don't know what to expect. The fact is that it's going to slow down the economy further and may result into a recession and higher inflation."

The U.S. announced tougher sanctions on Russia yesterday after months of separatist unrest in Ukraine's easternmost regions and the disaster involving a Malaysian Air jetł which U.S. officials have said was probably downed by a missile fired by the pro-Russian rebels. All 298 people aboard were killed, the bulk from the Netherlands.

October Review

The EU penalties will initially last for 12 months, though they'll be reviewed by the end of October, according to an EU official speaking on condition of anonymity. It would need unanimity from all 28 members of the bloc to scrap the measures before the 12 months are up.

"Europe is not likely to follow the course too aggressively for too long," J.P. Natkin, director of new business development for Macro Advisory consultancy in New York, said by phone. "It's much closer to home on every level to them, including energy prices, as they depend on energy exports from Russia. Once you get into October, people will start saying the sanctions are affecting their jobs and energy prices and that has to be changed."